Money

Last week, in Is Capital Creation Beating Capital Consumption, we asked an important question which is not asked nearly often enough. Perhaps that’s because few even acknowledge that capital is being consumed, and fewer tie it to the falling interest rate (perhaps that is because the fact of the falling interest rate is, itself, controversial). At any rate, we showed a graph of Marginal Productivity of Debt.

We said that this shows that consumption of capital is winning the race. And promised to introduce another new concept to explain why.

It is easy to think of government interference into the economy like a kind of friction. If producers and traders were fully free, then they could improve our quality of life—with new technologies, better products, and lower prices—at a rate of X. But the more that the government does, the more it burdens them. So instead of X rate of progress, we get the same end result but 10% slower or 20% slower.

Some would go so far as to say, “The free market finds ways to work even through government restrictions, taxes, and regulations.” We won’t address cardboard straws emerging where plastic straws are banned. Or gangs selling illegal drugs on the black market, when they are prohibited by law.

As usual, we want to talk about the most important kind of government intervention. And it happens to be the one kind of government intervention that is accepted by nearly everyone. The intervention supported by the otherwise-free-marketers.

A few years ago the Swiss National Bank (SNB) – which traditionally held “monetary assets” like government bonds, cash and gold to back up the Swiss franc — decided to branch out into common stocks.

This was a departure, but for a while a brilliant one. The SNB loaded up on Big Tech like Apple, Amazon and Microsoft, and rode them to massive profits, which enriched both the Swiss people and the SNB’s stockholders (in another departure, it’s a publicly traded company as well as a central bank).

I am a Tariff Man. When people or countries come in to raid the great wealth of our Nation, I want them to pay for the privilege of doing so. It will always be the best way to max out our economic power. We are right now taking in $billions in tariffs. MAKE AMERICA RICH AGAIN

@realDonaldTrump tweet 10:04EST, 4 December 2018

It is widely understood by economists of most theoretical persuasions that trade tariffs are a bad idea, but President Trump has laid out his stall. The political class, prodded usually by the vested interests of crony capitalists, always fall for trade protectionism. President Trump’s tariff war is just the latest example that coincidently stretches back to the introduction of central banks. I shall address this coincidence later in this article.

Any layman can tell you—and nearly everyone uses it this way in informal speech—that inflation is rising prices. Some will say “due to devaluation of the money.”

Economists will say, no it’s not rising prices per se. That is everywhere and always the effect. The cause, the inflation as such, is an increase in the quantity of money. Which is the same thing as saying devaluation. It is assumed that each unit of money commands a pro rata share of all the goods produced, so if there are more units then that means each unit is worth less. Value = 1 / N (where N is the number of units outstanding).